The Walt Disney Company Reports Fourth Quarter and Full Year Earnings for Fiscal 2018

BURBANK, Calif.--(BUSINESS WIRE)--
The Walt Disney Company (DIS) today reported earnings for its fourth quarter
and fiscal year ended September 29, 2018. Diluted earnings per share
(EPS) for the fourth quarter increased 37% to $1.55 from $1.13 in the
prior-year quarter. Excluding certain items affecting comparability(1),
EPS for the quarter increased 38% to $1.48 from $1.07 in the prior-year
quarter. EPS for the year increased to $8.36 from $5.69 in the prior
year. Excluding certain items affecting comparability(1), EPS
for the year increased to $7.08 from $5.70 in the prior year.

“We’re very pleased with our financial performance in fiscal 2018,
delivering record revenue, net income and earnings per share,” said
Robert A. Iger, Chairman and Chief Executive Officer, The Walt Disney
Company. “We remain focused on the successful completion and integration
of our 21st Century Fox acquisition and the further development of our
direct-to-consumer business, including the highly anticipated launch of
our Disney-branded streaming service late next year.”

The following table summarizes the fourth quarter and full year results
for fiscal 2018 and 2017 (in millions, except per share amounts):

Quarter Ended

Year Ended

Sept. 29,

Sept. 30,

Sept. 29,

Sept. 30,

2018

2017

Change

2018

2017

Change

Revenues

$

14,307

$

12,779

12

%

$

59,434

$

55,137

8

%

Segment operating income(1)

$

3,290

$

2,812

17

%

$

15,706

$

14,775

6

%

Net income(2)

$

2,322

$

1,747

33

%

$

12,598

$

8,980

40

%

Diluted EPS(2)

$

1.55

$

1.13

37

%

$

8.36

$

5.69

47

%

EPS excluding certain items affecting comparability(1)

$

1.48

$

1.07

38

%

$

7.08

$

5.70

24

%

Cash provided by operations

$

3,853

$

3,570

8

%

$

14,295

$

12,343

16

%

Free cash flow(1)

$

2,652

$

2,675

(1

%)

$

9,830

$

8,720

13

%

(1)

EPS excluding certain items affecting comparability, segment
operating income and free cash flow are non-GAAP financial measures.
Fiscal 2018 included a net benefit from new U.S. federal income tax
legislation (Tax Act). See the discussion on pages 8 through 11.

(2)

Reflects amounts attributable to shareholders of The Walt Disney
Company, i.e. after deduction of noncontrolling interests.

SEGMENT RESULTS

The following table summarizes the fourth quarter and full year segment
operating results for fiscal 2018 and 2017 (in millions):

Quarter Ended

Year Ended

Sept. 29,

Sept. 30,

Sept. 29,

Sept. 30,

2018

2017

Change

2018

2017

Change

Revenues:

Media Networks

$

5,963

$

5,465

9

%

$

24,500

$

23,510

4

%

Parks and Resorts

5,070

4,667

9

%

20,296

18,415

10

%

Studio Entertainment

2,151

1,432

50

%

9,987

8,379

19

%

Consumer Products & Interactive Media

1,123

1,215

(8

)%

4,651

4,833

(4

)%

$

14,307

$

12,779

12

%

$

59,434

$

55,137

8

%

Segment operating income:

Media Networks

$

1,528

$

1,475

4

%

$

6,625

$

6,902

(4

)%

Parks and Resorts

829

746

11

%

4,469

3,774

18

%

Studio Entertainment

596

218

>100

%

2,980

2,355

27

%

Consumer Products & Interactive Media

337

373

(10

)%

1,632

1,744

(6

)%

$

3,290

$

2,812

17

%

$

15,706

$

14,775

6

%

DISCUSSION OF FULL YEAR CONSOLIDATED RESULTS

For the year, the increase in diluted EPS was due to a lower effective
income tax rate, higher segment operating income, a decrease in weighted
average shares outstanding as a result of our share repurchase program
and the benefit from gains on the sale of real estate. These increases
were partially offset by the comparison to a non-cash net gain in
connection with the acquisition of a controlling interest in BAMTech,
LLC (BAMTech) in the prior year, impairments of our equity investments
in Vice Group Holding, Inc. (Vice) and Villages Nature in the current
year and higher net interest and corporate and unallocated shared
expenses.

The decrease in the effective income tax rate was due to the impact of
the Tax Act, which included:

A net benefit of $1.7 billion, which reflected a $2.1 billion benefit
from remeasuring our deferred tax balances to the new statutory rate
(Deferred Remeasurement), partially offset by a charge of $0.4 billion
for a one-time tax on certain accumulated foreign earnings (Deemed
Repatriation Tax).

A reduction of the Company’s fiscal 2018 U.S. statutory federal income
tax rate to 24.5% from 35.0% in the prior year, which resulted in a
net benefit of approximately $1.2 billion.

Higher segment operating income was due to increases at Parks and
Resorts and Studio Entertainment, partially offset by decreases at Media
Networks and Consumer Products & Interactive Media. The increase at
Parks and Resorts was due to growth at both our domestic and
international operations. The increase at our domestic operations was
due to higher guest spending and volumes, partially offset by cost
inflation, higher technology and operations support expenses and a
special fiscal 2018 domestic employee bonus. In addition, results
reflected the comparison to the negative prior-year impacts of
Hurricanes Irma and Matthew. Internationally, the increase was due to
higher guest spending and volumes at both Disneyland Paris and Hong Kong
Disneyland Resort. The increase at Studio Entertainment was due to the
exceptional performance of our theatrical releases driven by Black
Panther, Star Wars: The Last Jedi, Avengers: Infinity War and
Incredibles 2. The decrease at Media Networks was due to lower
advertising revenue, higher losses from Hulu LLC (Hulu) and BAMTech and
contractual rate increases for sports programming. These decreases were
partially offset by higher affiliate revenues and an increase in income
from program sales. The decrease at Consumer Products & Interactive
Media was primarily due to lower income from licensing activities and a
decrease in comparable store sales at our retail business.

The increase in net interest expense was due to an increase in average
interest rates, higher average debt balances and financing costs related
to the pending Twenty-First Century Fox, Inc. (21CF) acquisition. Higher
corporate and unallocated shared expenses were due to costs incurred in
connection with the 21CF acquisition and higher compensation costs.

DISCUSSION OF FOURTH QUARTER SEGMENT RESULTS

Media Networks

Media Networks revenues for the quarter increased 9% to $6.0 billion,
and segment operating income increased 4% to $1.5 billion. The following
table provides further detail of the Media Networks results (in
millions):

Quarter Ended

Year Ended

Sept. 29,

Sept. 30,

Sept. 29,

Sept. 30,

2018

2017

Change

2018

2017

Change

Revenues:

Cable Networks

$

4,130

$3,951

5

%

$

17,063

$

16,527

3

%

Broadcasting

1,833

1,514

21

%

7,437

6,983

7

%

$

5,963

$5,465

9

%

$

24,500

$

23,510

4

%

Segment operating income:

Cable Networks

$

1,159

$1,236

(6

)%

$

5,126

$

5,353

(4

)%

Broadcasting

379

229

66

%

1,368

1,205

14

%

Equity in the income of investees

(10

)

10

nm

131

344

(62

)%

$

1,528

$1,475

4

%

$

6,625

$

6,902

(4

)%

Cable Networks

Cable Networks revenues for the quarter increased 5% to $4.1 billion and
operating income decreased $77 million to $1.2 billion. Lower operating
income was due to the consolidation of BAMTech, partially offset by
increases at the Disney Channels and Freeform.

In the current quarter, BAMTech’s operating loss is reported in Cable
Networks as a result of our acquisition of a controlling interest on
September 25, 2017. In the prior-year quarter, the Company’s share of
BAMTech results through September 25, 2017 was reported in equity in the
income of investees. The loss at BAMTech reflects content and marketing
costs and ongoing investments in their technology platform.

The increase at the Disney Channels was driven by lower programming
costs, higher income from program sales and decreased marketing costs.

Higher operating income at Freeform was due to lower programming costs,
increased affiliate revenue and lower marketing costs. These increases
were partially offset by lower advertising revenue due to a decrease in
impressions driven by a decrease in average viewership and fewer units
delivered.

Results at ESPN were comparable to the prior-year quarter as affiliate
revenue growth was offset by higher programming and production costs,
driven by contractual rate increases, and lower advertising revenue.
Affiliate revenue growth was due to contractual rate increases,
partially offset by a decline in subscribers. Lower advertising revenue
was driven by a decrease in impressions due to lower average viewership
and fewer units delivered.

Broadcasting

Broadcasting revenues for the quarter increased 21% to $1.8 billion and
operating income increased $150 million to $379 million. The increase in
operating income was due to higher program sales and affiliate revenue
growth driven by contractual rate increases.

The increase in program sales was primarily due to sales of two Marvel
series and Black-ish in the current quarter compared to one
Marvel series in the prior-year quarter.

Advertising revenues were comparable to the prior-year quarter as lower
network impressions were offset by higher network rates and an increase
in political advertising at the owned television stations.

Equity in the Income (loss) of Investees

Equity in the income of investees decreased by $20 million to a loss of
$10 million primarily due to higher losses from Hulu and lower income at
A+E Television Networks (A+E), partially offset by the comparison to a
loss from BAMTech in the prior-year quarter, which is now consolidated
and reported in Cable Networks. The higher loss at Hulu was due to
higher programming, marketing and labor costs, partially offset by
growth in subscription and advertising revenue. The decrease at A +E was
due to higher programming costs and lower advertising revenue, partially
offset by higher program sales.

Parks and Resorts

Parks and Resorts revenues for the quarter increased 9% to $5.1 billion,
and segment operating income increased 11% to $829 million. Operating
income growth for the quarter was due to an increase at our domestic
operations. Domestic results reflected the comparison to the adverse
impact of Hurricane Irma, which occurred in the prior-year quarter.

Higher operating income at our domestic operations was primarily due to
increased guest spending and attendance, partially offset by increased
costs. Guest spending growth was due to increases in average ticket
prices for theme park admissions and cruise line sailings, food,
beverage and merchandise spending and average daily hotel room rates.
The increase in costs was primarily due to labor and other cost
inflation, a special fiscal 2018 domestic employee bonus and higher
charges for project abandonments.

Operating income at our international parks and resorts was comparable
to the prior-year quarter as growth at Disneyland Paris and Hong Kong
Disneyland Resort was offset by a decrease at Shanghai Disney Resort.
Operating income growth at Disneyland Paris was due to an increase in
average ticket prices while growth at Hong Kong Disneyland Resort was
due to higher occupied room nights and attendance growth, partially
offset by cost inflation. The decrease at Shanghai Disney Resort was due
to lower average ticket prices, partially offset by increased attendance.

Studio Entertainment

Studio Entertainment revenues for the quarter increased 50% to $2.2
billion and segment operating income increased $378 million to $596
million. The increase in operating income was due to growth in
theatrical distribution, lower film cost impairments and higher TV/SVOD
and home entertainment distribution results.

The increase in theatrical distribution results was due to the success
of Incredibles 2 and Ant-Man and the Wasp in the current
quarter compared to Cars 3 and no Marvel release in the
prior-year quarter.

The decrease in film cost impairments reflected a write-off in the
prior-year quarter of an animated title that was in development.

Higher TV/SVOD distribution results were due to growth in our
international free and pay television businesses.

The increase in home entertainment results was due to higher unit sales
and net effective pricing, partially offset by higher per unit
amortization costs, all of which reflected the performance of Avengers:
Infinity War in the current quarter compared to Guardians of the
Galaxy: Vol. 2 in the prior-year quarter. Other significant titles
included Solo: A Star Wars Story in the current quarter, while
the prior-year quarter included Beauty and the Beast.

Consumer Products & Interactive Media

Consumer Products & Interactive Media revenues for the quarter decreased
8% to $1.1 billion, and segment operating income decreased 10% to $337
million due to asset impairments and lower income from licensing
activities, partially offset by lower general and administrative costs
at our games business. The asset impairments reflected write-offs of
leasehold improvements at certain retail stores.

Lower income from licensing activities was due to a decrease in revenue
from products based on Star Wars and Cars and lower minimum guarantee
shortfall recognition. These decreases were partially offset by lower
third-party royalty expense and an increase in revenue from products
based on Spider-Man. Lower minimum guarantee shortfall recognition was
due to an unfavorable timing impact. Shortfalls are generally recognized
at the end of the contract period. Because our fiscal quarter ended on
September 29, we did not recognize shortfalls for contractual periods
that ended on September 30 in the fourth quarter of fiscal 2018, whereas
they were recognized in the fourth quarter of the prior year.

OTHER QUARTERLY FINANCIAL INFORMATION

Corporate and Unallocated Shared Expenses

Corporate and unallocated shared expenses increased $31 million from
$190 million to $221 million for the quarter due to costs incurred in
connection with the 21CF acquisition and higher compensation costs,
partially offset by the timing of allocations to operating segments.

Interest Expense, net

Interest expense, net was as follows (in millions):

Quarter Ended

Sept. 29,

Sept. 30,

2018

2017

Change

Interest expense

$

(189

)

$

(137

)

(38

)%

Interest and investment income

30

52

(42

)%

Interest expense, net

$

(159

)

$

(85

)

(87

)%

The increase in interest expense for the quarter was due to an increase
in average interest rates and financing costs related to the 21CF
acquisition.

The decrease in interest and investment income for the quarter was due
to the comparison to gains on investments recognized in the prior-year
quarter.

Equity in the Income (Loss) of Investees, net

Equity in the income (loss) of investees was as follows (in millions):

Quarter Ended

Sept. 29, 2018

Sept. 30, 2017

Change

Equity in the income (loss) of investees in segment results:

Media Networks

$

(10

)

$

10

nm

Parks and Resorts

(4

)

(17

)

76

%

Impairment of equity investments

(210

)

—

nm

Equity in the loss of investees, net

$

(224

)

$

(7

)

>(100

)%

Income Taxes

The effective income tax rate was as follows:

Quarter Ended

Sept. 29,

Sept. 30,

2018

2017

Change

Effective income tax rate

24.5

%

30.8

%

6.3

ppt

The decrease in the effective income tax rate for the quarter was due to
the impact of the Tax Act and the benefit of a tax loss from liquidating
a legal entity. The net favorable impact of the Tax Act reflects the
following:

A reduction in the Company’s fiscal 2018 U.S. statutory federal income
tax rate to 24.5% from 35.0% in the prior year. Net of state tax and
other related effects, the reduction in the statutory rate had a
positive impact of approximately 6.3 percentage points on the
effective income tax rate.

A negative impact of approximately $100 million from updating our
prior quarter Deemed Repatriation Tax and Deferred Remeasurement. This
update reflected the impact of proposed IRS regulations issued in the
current quarter. This impact was approximately 3.2 percentage points
on the effective income tax rate.

Noncontrolling Interests

Net income attributable to noncontrolling interests was as follows (in
millions):

Quarter Ended

Sept. 29,

Sept. 30,

2018

2017

Change

Net income attributable to noncontrolling interests

$

97

$

118

(18

)%

The decrease in net income attributable to noncontrolling interests was
due to losses at our direct-to-consumer sports business, partially
offset by the impact of lower tax expense at ESPN.

Net income attributable to noncontrolling interests is determined on
income after royalties and management fees, financing costs and income
taxes, as applicable.

FULL YEAR CASH FLOW STATEMENT INFORMATION

Cash Flow

Cash provided by operations and free cash flow were as follows (in
millions):

Year Ended

Sept. 29,

Sept. 30,

2018

2017

Change

Cash provided by operations

$

14,295

$

12,343

$

1,952

Investments in parks, resorts and other property

(4,465

)

(3,623

)

(842

)

Free cash flow(1)

$

9,830

$

8,720

$

1,110

(1)

Free cash flow is not a financial measure defined by GAAP. See the
discussion on pages 8 through 11.

Cash provided by operations for fiscal 2018 increased 16% or $2.0
billion to $14.3 billion compared to fiscal 2017. The increase in cash
provided by operations was due to lower income tax payments, a decrease
in pension contributions and higher segment operating income, partially
offset by higher film and television production spending and a payment
for the rights to develop a real estate property in New York.

Capital Expenditures and Depreciation Expense

Investments in parks, resorts and other property were as follows (in
millions):

Year Ended

Sept. 29,

Sept. 30,

2018

2017

Media Networks

Cable Networks

$

202

$

75

Broadcasting

87

64

Total Media Networks

289

139

Parks and Resorts

Domestic

3,212

2,375

International

671

816

Total Parks and Resorts

3,883

3,191

Studio Entertainment

96

85

Consumer Products & Interactive Media

18

30

Corporate

179

178

Total investments in parks, resorts and other property

$

4,465

$

3,623

Capital expenditures increased from $3.6 billion to $4.5 billion driven
by higher spending on new attractions at our domestic parks and resorts
and on technology at BAMTech, partially offset by lower spending at Hong
Kong Disneyland Resort and Shanghai Disney Resort.

Depreciation expense was as follows (in millions):

Year Ended

Sept. 29,

Sept. 30,

2018

2017

Media Networks

Cable Networks

$

172

$

137

Broadcasting

92

88

Total Media Networks

264

225

Parks and Resorts

Domestic

1,410

1,336

International

742

660

Total Parks and Resorts

2,152

1,996

Studio Entertainment

55

50

Consumer Products & Interactive Media

69

63

Corporate

218

252

Total depreciation expense

$

2,758

$

2,586

Non-GAAP Financial Measures

This earnings release presents EPS excluding the impact of certain items
affecting comparability, free cash flow and aggregate segment operating
income, all of which are important financial measures for the Company
but are not financial measures defined by GAAP.

These measures should be reviewed in conjunction with the relevant GAAP
financial measures and are not presented as alternative measures of EPS,
cash flow or net income as determined in accordance with GAAP. EPS
excluding certain items affecting comparability, free cash flow and
aggregate segment operating income as we have calculated them may not be
comparable to similarly titled measures reported by other companies.

EPS excluding certain items affecting comparability
– The Company uses EPS excluding certain items to evaluate the
performance of the Company’s operations exclusive of certain items
affecting comparability of results from period to period. The Company
believes that information about EPS exclusive of these items is useful
to investors, particularly where the impact of the excluded items is
significant in relation to reported earnings, because the measure allows
for comparability between periods of the operating performance of the
Company’s business and allows investors to evaluate the impact of these
items separately from the impact of the operations of the business.

Tax benefit/expense adjustments are determined using the tax rate
applicable to the individual item affecting comparability.

(2)

Before noncontrolling interest share.

(3)

Net of noncontrolling interest share, where applicable. Total may
not equal the sum of the column due to rounding.

(4)

Items affecting comparability during the fourth quarter of fiscal
2018 include a gain on the sale of real estate ($507 million), which
was recorded in “Other income, net” in the Condensed Consolidated
Statements of Income, impairments of Vice and Villages Nature equity
method investments ($157 million and $53 million, respectively),
which were recorded in “Equity in the income (loss) of investees,
net” in the Condensed Consolidated Statements of Income, and the
impacts of the Deemed Repatriation Tax ($86 million) and the
Deferred Remeasurement ($14 million) related to the Tax Act.

(5)

In the prior-year quarter, items affecting comparability included a
non-cash net gain in connection with the acquisition of a
controlling interest in BAMTech ($255 million), which was recorded
in “Other income, net” in the Condensed Consolidated Statements of
Income, and restructuring and impairment charges ($98 million).

The following table reconciles reported EPS to EPS excluding certain
items affecting comparability for the year:

EPS

Pre-Tax

Tax

After-Tax

Change vs.

Income/

Benefit/

Income/

prior year

(in millions except EPS)

Loss

Expense (1)

Loss (2)

EPS (3)

period

Year Ended September 29, 2018:

As reported

$

14,729

$

(1,663

)

$

13,066

$

8.36

47

%

Exclude(4):

Net benefit from the Tax Act

—

(1,701

)

(1,701

)

(1.11

)

Other income, net

(601

)

158

(443

)

(0.30

)

Impairment of equity investments

210

(49

)

161

0.11

Restructuring and impairment charges

33

(7

)

26

0.02

Excluding certain items affecting comparability

$

14,371

$

(3,262

)

$

11,109

$

7.08

24

%

Year Ended September 30, 2017:

As reported

$

13,788

$

(4,422

)

$

9,366

$

5.69

Exclude(5):

Gain related to the acquisition of BAMTech

(255

)

93

(162

)

(0.10

)

Settlement of litigation

177

(65

)

112

0.07

Restructuring and impairment charges

98

(31

)

67

0.04

Excluding certain items affecting comparability

$

13,808

$

(4,425

)

$

9,383

$

5.70

(1)

Tax benefit/expense adjustments are determined using the tax rate
applicable to the individual item affecting comparability.

(2)

Before noncontrolling interest share.

(3)

Net of noncontrolling interest share, where applicable. Total may
not equal the sum of the column due to rounding.

(4)

Items affecting comparability for fiscal 2018 include a net benefit
of $1.7 billion from the Tax Act due to a $2.1 billion benefit from
the Deferred Remeasurement, partially offset by a $0.4 billion
impact from the Deemed Repatriation Tax. In addition, the current
year includes gains from the sale of real estate and property rights
($560 million), insurance proceeds related to a legal matter ($38
million) and an adjustment to a fiscal 2017 non-cash gain ($3
million), which were recorded in “Other income, net” in the
Condensed Consolidated Statements of Income, impairments of Vice and
Villages Nature equity method investments ($157 million and $53
million, respectively), which were recorded in “Equity in the income
(loss) of investees, net” in the Condensed Consolidated Statements
of Income, and restructuring and impairment charges ($33 million).

(5)

Items affecting comparability for fiscal 2017 included a non-cash
net gain in connection with the acquisition of a controlling
interest in BAMTech ($255 million), a charge, net of committed
insurance recoveries, in connection with the settlement of
litigation ($177 million) and restructuring and impairment charges
($98 million). The gain in connection with the acquisition of
BAMTech and charge related to the settlement of litigation were
recorded in “Other income, net” in the Condensed Consolidated
Statements of Income.

Free cash flow – The Company uses free cash
flow (cash provided by operations less investments in parks, resorts and
other property), among other measures, to evaluate the ability of its
operations to generate cash that is available for purposes other than
capital expenditures. Management believes that information about free
cash flow provides investors with an important perspective on the cash
available to service debt obligations, make strategic acquisitions and
investments and pay dividends or repurchase shares.

Aggregate segment operating income – The
Company evaluates the performance of its operating segments based on
segment operating income, and management uses aggregate segment
operating income as a measure of the performance of operating businesses
separate from non-operating factors. The Company believes that
information about aggregate segment operating income assists investors
by allowing them to evaluate changes in the operating results of the
Company’s portfolio of businesses separate from non-operational factors
that affect net income, thus providing separate insight into both
operations and the other factors that affect reported results.

The following table reconciles income before income taxes to segment
operating income (in millions):

Quarter Ended

Year Ended

Sept. 29,

Sept. 30,

Sept. 29,

Sept. 30,

2018

2017

Change

2018

2017

Change

Income before income taxes

$

3,202

$

2,694

19

%

$

14,729

$

13,788

7

%

Add/(subtract):

Corporate and unallocated shared expenses

221

190

(16

)%

761

582

(31

)%

Restructuring and impairment charges

5

98

95

%

33

98

66

%

Other income, net

(507

)

(255

)

99

%

(601

)

(78

)

>100

%

Interest expense, net

159

85

(87

)%

574

385

(49

)%

Impairment of equity investments(1)

210

—

nm

210

—

nm

Segment Operating income

$

3,290

$

2,812

17

%

$

15,706

$

14,775

6

%

(1)

Reflects impairments of Vice and Villages Nature

CONFERENCE CALL INFORMATION

In conjunction with this release, The Walt Disney Company will host a
conference call today, November 8, 2018, at 4:30 PM EST/1:30 PM PST via
a live webcast. To access the webcast go to www.disney.com/investors.
The discussion will be archived.

FORWARD-LOOKING STATEMENTS

Management believes certain statements in this earnings release may
constitute “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are
made on the basis of management’s views and assumptions regarding future
events and business performance as of the time the statements are made.
Management does not undertake any obligation to update these statements.

Actual results may differ materially from those expressed or
implied. Such differences may result from actions taken by the Company,
including restructuring or strategic initiatives (including capital
investments or asset acquisitions or dispositions), as well as from
developments beyond the Company’s control, including: